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Audit shows Denton Municipal Electric traders have not kept up with market

A special audit found that the energy trading group inside Denton Municipal Electric has not kept up with the increasing complexity of the Texas electricity market, putting its operations and ratepayers at greater risk of price fluctuations. 

Representatives from Deloitte, which conducted the audit, presented their findings to the Denton City Council during a work session Tuesday afternoon. The audit also found that DME and the city government weren't following a risk management plan written for the trading group when it was formed in 2014. However, that 3-year-old plan also needs to be updated, they said. 

George Morrow, DME's new general manager, said employees were already implementing many recommendations from the audit. Morrow, who has been on the job for about three weeks, said he wasn't surprised by anything the auditors told city leaders Tuesday. 

"It's like getting an annual physical — it gives us places to go," Morrow said. 

Following the audit recommendations, the first big items on Morrow's to-do list include writing a new risk management plan and setting up a new mathematical model to calculate trades, he said. 

As the Texas electricity market became deregulated, a new entity, the Electric Reliability Council of Texas, stepped in to oversee the marketplace where electricity is generated, bought and sold. Most city-owned utilities don’t try to do their own trading in ERCOT; they hire a company to manage those trades and the risk that comes with them. 

DME set up its trading group, the Energy Management Organization, expecting that it would be able to save money by doing its own trades and managing the risk itself. 

That's been true so far, said Steve Engler of Deloitte. Depending on the preferred measurement, the trading group saved DME somewhere between $2 million and $10 million last year. Earlier this year, Deloitte also helped DME set up a good benchmark so that city leaders can check the trading group's performance. 

But to help prevent the trading group from losing all that savings in risky trades, DME needs to better plan and manage the risk that comes from in-house operations, the analysts said. 

For example, DME has some long-term contracts to purchase power at a set price. Those agreements can help keep rates low and stable when electricity prices spike temporarily or increase over a longer period. Yet, those seemingly stable contracts also come with their own kind of risk: When the market dips, or prices decrease over a longer period, ratepayers can't enjoy the savings.

That happened recently. DME's long-term contract for coal-fired power kept local electric rates competitive for many years — until renewable energy changed the marketplace and coal-fired power got too expensive. To address that, DME has signed several long-term contracts for both wind and solar power and is expected to sign a few more before it walks away from coal-fired power next year. 

On the other side, if DME bought electricity only through the ERCOT market, ratepayers might enjoy competitive rates. There are times, for example, when abundant wind power drives the purchase price to zero. However, ratepayers would also face the risk of price spikes on hot summer days, too. 

DME and the trading group can limit those risks with "hedges," different kinds of electricity marketplace insurance. 

Deloitte told the City Council that its risk management policy should specify what kinds of hedges the trading group can buy and what kinds are prohibited. The council should also place other limits on the trading group that can help manage the risks. 

The trading group needs to know "when you're in bounds and when you're out of bounds," Engler said. 

Council member Gerard Hudspeth told the analysts that the information they provided was hard to explain to the average ratepayer. 

"Immediately your mind goes to the rates," Hudspeth said. "It's the initial point of a citizen's question." 

While ERCOT publishes the market prices, Engler said he understood how that might not help in transparency with ratepayers. 

Deputy City Manager Bryan Langley said the City Council should expect to see not only a new risk management policy for the Energy Management Organization, but also a new pro forma (financial plan) for DME with ways to evaluate its performance after the start of new year. 

PEGGY HEINKEL-WOLFE can be reached at 940-566-6881. 

Upcoming Traffic Projects

After the city staff projected about $3 million in new revenue this year, the City Council agreed to use the money to finish the Vela Soccer Complex in North Lakes Park and pay for about $2.1 million in additional street improvement projects. They are: 

  • Extending the eastbound left-turn lane at Loop 288 and Colorado Boulevard.

  • Adding a westbound right-turn lane at Country Club and Hickory Creek roads.

  • Adding turn lanes and channelized islands at Dallas Drive (U.S. Highway 77) and Teasley Lane.

  • Adding a northbound right-turn lane at Bell Avenue and McKinney Street.

  • Adding a northbound left-turn lane and improving the turning radius on the southeast corner at Carroll Boulevard and Sherman Drive.

  • Adding left-turn lanes (north and south) at East University Drive and Old North Road.

In Other Action

During a special meeting Tuesday afternoon, the Denton City Council also:

  • Agreed to study the impact of closing Avenue C, Highland and Maple streets through the University of North Texas campus. The city’s portion of the joint study costs $112,350. The council also agreed to study traffic patterns in neighborhoods around campus, awarding that contract to Walter P. Moore and Associates for $224,700.

  • Authorized the city attorney to intervene in Denton Municipal Electric’s transmission rate case pending with the Public Utility Commission of Texas.

  • Awarded a $196,497 contract to Johnston Technical Services for a new radio communications network between seven of the city’s water production facilities, a $442,873 contract to Rockstar Welding for construction of fences at IOOF and Oakwood cemeteries, and a $1.2 million contract with Freese and Nichols for the design of drainage improvements planned for property in the floodplain south of the Square.  

  • Awarded a three-year contract to Wesco Distribution for transmission conductors for $140,000 and to the lowest bidders for multiple park landscaping products and supplies totaling $196,741.

  • Agreed to join the Atmos Cities Steering Committee and the Alliance of Oncor Cities for future rate cases.

FEATURED PHOTO: Denton Municipal Electric analysts monitor a wide variety of information to help them determine when to buy and sell electricity at the best price. DRC file photo